By Cynthia Kim and Jihoon Lee
SEOUL, July 16 (Reuters) – South Korea’s central bank raised its benchmark interest rate for the first time in three-and-a-half years on Thursday and flagged more to come, as brisk growth in Asia’s fourth-largest economy fanned inflation risks.
The seven-member monetary policy board at the Bank of Korea voted to raise the seven-day repurchase rate by 25 basis points to 2.75% to stabilise a slumping won and counter persistent inflationary pressure.
In a statement, the bank also said the economic growth rate for South Korea is expected to “considerably exceed” the bank’s May forecast of 2.6%, while inflation will remain high for “a considerable time.”
“With developments across all three areas — growth, inflation, and financial stability — supporting the need for an interest rate hike, it was judged appropriate to raise rates at this meeting,” Governor Shin Hyun Song said in a news conference in Seoul.
“Unlike major countries with weak economic recoveries, demand-side inflationary pressures are expected to gradually increase as the impact of the semiconductor boom spills over into domestic demand.”
The dollar-won rate remained muted on the widely expected decision. The benchmark KOSPI was off 6.2% as of 0318 GMT, mostly due to renewed selling in chipmakers’ stocks. The three-year government bond yield edged down slightly to 3.862%.
The economy has been rebounding faster than expected this year, thanks to a boom in semiconductor exports and investment, even as the local currency remains pressured, with the won weakening 3.4% against the greenback.
Gross domestic product expanded 1.8% in the first quarter, the fastest pace in nearly six years, prompting the government to raise growth forecasts to a five-year high of 3.0% for this year on the back of a global semiconductor boom.
“(Shin) was remarkably clear. Usually when officials say they are data-dependent, they speak in general terms, but he gave two specific indicators to watch — second quarter GDP and July inflation data,” said Ahn Jae-kyun, an analyst at Korea Investment Securities, who expects the BOK to raise rates again in the fourth quarter.
“By clarifying exactly what to monitor and signaling that the door remains open for back-to-back hikes, those comments helped alleviate market uncertainty (about the policy path).”
The rate hike aligns the BOK closely with the central bank in neighbouring Japan, which recently raised its own benchmark rate to a 31-year high.
Central banks in Australia, New Zealand, Indonesia and the Philippines have already tightened their monetary policies.
With the headline inflation figure at a 2-1/2-year high in South Korea, a majority of analysts see the BOK delivering at least one more rate hike before the end of this year to take the policy rate to 3.00%.
Median forecasts showed the BOK would raise its key rate to 3.25% in the first quarter of 2027 and keep it there until at least the end of next year.
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Sam Holmes)
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